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What market risk capital reporting tells us about bank risk

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  • Beverly Hirtle

Abstract

This paper was presented at the conference "Economic Statistics: New Needs for the Twenty-First Century," cosponsored by the Federal Reserve Bank of New York, the Conference on Research in Income and Wealth, and the National Association for Business Economics, July 11, 2002. In recent years, financial market supervisors and the financial services industry have increasingly emphasized the role of public disclosure in ensuring the efficient and prudent operation of financial institutions. This article examines the market risk capital figures reported to bank regulators by U.S. bank holding companies with large trading operations to assess the extent to which such disclosure provides market participants with meaningful information about risk. It argues that when one looks across banks, market risk capital figures provide little additional information about the extent of an institution's market risk exposure beyond what is conveyed by simply knowing the relative size of its trading account. In contrast, when one examines individual banks over time, these figures appear to provide information not available from other data in regulatory reports. These findings suggest that market risk capital figures are most useful for tracking changes in individual banks' market risk exposures over time.

Suggested Citation

  • Beverly Hirtle, 2003. "What market risk capital reporting tells us about bank risk," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 37-54.
  • Handle: RePEc:fip:fednep:y:2003:i:sep:p:37-54:n:v.9no.3
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    References listed on IDEAS

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    1. Peter F. Christoffersen & Francis X. Diebold & Til Schuermann, 1998. "Horizon problems and extreme events in financial risk management," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 109-118.
    2. Jeremy Berkowitz & James O'Brien, 2002. "How Accurate Are Value-at-Risk Models at Commercial Banks?," Journal of Finance, American Finance Association, vol. 57(3), pages 1093-1111, June.
    3. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
    4. David M. Jones & John J. Mingo, 1998. "Industry practices in credit risk modeling and internal capital allocations: implications for a models-based regulatory capital standard," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 53-60.
    5. Robert L. Joss, 2001. "Management," Australian Journal of Management, Australian School of Business, vol. 26(1_suppl), pages 89-103, August.
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    Citations

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    Cited by:

    1. O'Brien, James M. & Szerszen, Pawel J., 2014. "An Evaluation of Bank VaR Measures for Market Risk During and Before the Financial Crisis," Finance and Economics Discussion Series 2014-21, Board of Governors of the Federal Reserve System (U.S.).
    2. Patrick de Fontnouvelle & Eric Rosengren & John Jordan, 2007. "Implications of Alternative Operational Risk Modeling Techniques," NBER Chapters,in: The Risks of Financial Institutions, pages 475-512 National Bureau of Economic Research, Inc.
    3. Hirtle, Beverly, 2016. "Public disclosure and risk-adjusted performance at bank holding companies," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 151-173.
    4. Philippe Jorion, 2007. "Bank Trading Risk and Systemic Risk," NBER Chapters,in: The Risks of Financial Institutions, pages 29-58 National Bureau of Economic Research, Inc.
    5. Rosenberg, Joshua V. & Schuermann, Til, 2006. "A general approach to integrated risk management with skewed, fat-tailed risks," Journal of Financial Economics, Elsevier, vol. 79(3), pages 569-614, March.
    6. Frésard, Laurent & Pérignon, Christophe & Wilhelmsson, Anders, 2011. "The pernicious effects of contaminated data in risk management," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2569-2583, October.
    7. Pérignon, Christophe & Smith, Daniel R., 2010. "Diversification and Value-at-Risk," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 55-66, January.
    8. Pérignon, Christophe & Smith, Daniel R., 2010. "The level and quality of Value-at-Risk disclosure by commercial banks," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 362-377, February.
    9. Ho Hwang, Jong, 2013. "A proposal for an open-source financial risk model," LSE Research Online Documents on Economics 59298, London School of Economics and Political Science, LSE Library.
    10. Marc Saidenberg & Til Schuermann & May, "undated". "The New Basel Capital Accord and Questions for Research," Center for Financial Institutions Working Papers 03-14, Wharton School Center for Financial Institutions, University of Pennsylvania.
    11. de Fontnouvelle, Patrick & Dejesus-Rueff, Virginia & Jordan, John S. & Rosengren, Eric S., 2006. "Capital and Risk: New Evidence on Implications of Large Operational Losses," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1819-1846, October.
    12. repec:eee:jbfina:v:80:y:2017:i:c:p:215-234 is not listed on IDEAS

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